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Market is in extreme panic, it is like early 2009 or 2003: Vikas Khemani

ET Now|
Aug 08, 2019, 12.37 PM IST
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Vikas Khemani-1200

Highlights

  • Waiting for steps to be taken by govt to increase credit flow.
  • We are sitting on almost 50% cash and will invest over next 2-3 months.
  • We will deploy capital only once we are comfortable that the worst is behind us.
We are sitting on almost 50% cash and we see there will be interesting opportunities to deploy capital over the next two to three months, says Vikas Khemani, Founder, Carnelian Capital. Excerpts from an interview with ETNOW.

It is great to talk from long-term perspective. It is great to talk about India as a great destination for a three-year or a five-year investor. But one has to be realistic about what is happening to the economy as otherwise, you are losing your portfolio value on a daily basis. How are you dealing with this storm? Are you raising cash or are you buying more?
While having a perspective on the long term, you have to navigate short term, day-to-day developments. But the kind of environment we are in, is pretty much similar to what we saw in some sense in early 2009 or in 2003. It has happened before and it will happen again. We have seen market sentiments going from euphoria to panic and right now, it is in an extreme state of panic. I am not denying, there are real issues. The economy is definitely slowing down and there needs to be concentrated development or move by the government to kickstart the economy.

But interest rates are coming down, oil prices are under reasonably good control. So, there is a mix of the good things and terrible things and that is where the market is right now. The way we have been playing it out is we have been watching the situation day in and day out. We are sitting on almost 50% cash and we see there will be interesting opportunities to deploy capital over the next two to three months.

I have said it repeatedly that the vintage of 2019 would be one of the best vintages, pretty much similar to what we had in 2014 because today panic is at its peak. Every day, you have new lows on most stocks. Negative sentiments are high. These are the typical good times to build portfolios but at the same time one has to be careful and mindful of the fact that on a day to day basis the developments on the economic front. We are very cautiously watching everything.

And in this caution, what is it that you are doing as an investor? Is there a strategy in place? Is there a list that you are buying on dips or at least keeping ready?
No. We are at an interesting juncture in the economy where it will either improve from here or worsen further. These are two ways it can go. The key difference lies in the concrete measures being taken by the regulators and by the government to revive the economy.

Hence, there is no point in making a judgement and saying it is the best time and go out and deploy full capital. Concrete measures are being taken that will determine the speed of the recovery and will determine the timing of the recovery. What is important is whether it will worsen before recovery.

We are really watching how and what steps are being taken by the government to have a flow of credit into the system. How fast NBFCs can get back to lending is a really big issue. So is how automobile demand can pick up and recovery can happen. A lot of things you are watching on a day-to-day basis but at the same time looks like that we are very close to the end. Maybe next two-three months will be more or less defining movements and will probably settle things down. We will be deploying capital only once we are comfortable that the worst is behind us and measures are being taken by the government to kickstart the economy and the supply of the credit flow into the economy. To me, that is the single biggest problem right now for the economy.

Anand Mahindra yesterday sounded an SOS for the auto sector saying that the deepening crisis in the sector would also impact the fiscal math. Do you agree the slowdown is going to be perhaps even more severe than anticipated unless solid measures are taken?
Absolutely. I do agree that automobiles is facing serious slowdown problems. There are job losses and in fact some of the dealers are facing the heat. Many of them are planning to shut down. They are really losing money because demand has dropped significantly. Automobile, real estate are the real sectors that create employment. What we see is a vicious effectof credit supply crunch and demand reduction playing out.

I am beginning to hear that stress in the SMEs is getting built and we have seen in all the banking portfolios, that the stress or NPA levels in the retail side has gone up. These are the worry signs and unless they are addressed in a very concrete manner, this can degenerate further. One has to watch the situation every day and see what steps have been taken. Whether it will degenerate before revival or revive really depends on what measures have been taken and hence every day on a regular basis, you have to watch out for what is going to happen to revive the economy. I am quite hopeful that the government will do something but we just cannot be complacent about it.

Are you saying that it will get worse before it gets better both for economy and for prices?
I do not know if it really depends on what measures have been taken and whether coordinated aggressive measures have been taken to kickstart the economy. If that is done, we might see a quick recovery and if a muted approach is taken which is the current case, then we might still see some more downside.

I do not know if we will have to wait and watch. Yesterday, the RBI governor made some move in terms of relaxation on the NBFC side, but it takes too long to percolate down in the system. The real estate sector is starving for capital. Job losses are happening out there and so that sector needs capital. Automobile needs capital and there are lots of sectors that need capital. We are not very sure. We will watch out till the end and we will invest only we feel things are moving in the right direction.

When you are watching out for that point of comfort, is it purely from an earnings point of view or would it also be from a valuation point of view? How would you balance the two currently? You have also been most comfortable with consumption. Would that be your top theme?
Consumption and IT generally have been defensives and they are not reasonable in valuation. So, you have to hide somewhere. I am sure most people right now are finding comfort out there. Consumption is one sector which benefits when there is economic revival. Specifically, on the discretionary consumption side, we have seen a lot of correction across the board and we would definitely look to buy them as and when the revival happens because there you will get good recovery and good delta once the economy revives. We would focus more on that rather than the kind of hugely over-owned defensive staples.

Reliance has fallen 20%. It has got nothing to do with what is happening to the economy; the Jio business is independent, retail business is okay. They are a petrochemical company, they get money from refining margins. Those businesses are still intact and yet the stock is down 20%. The stock is almost in a bear market?
Reliance had a great rally before it fell 20% for a long period of time and right now, we are seeing high leverage concerns cropping up. Some of the sell-side houses have written about it. When these kind of concerns around high debt is raised, people spooked and that is what is happening in Reliance.

I am not saying it is not a genuine worry. It is a worry because as far as Jio is concerned, you need to see cash flow, you need to see some deleverage and I am sure the management recognises that as well. We will have to wait and watch how this deleveraging happens but I would say we are quite positive from a long term perspective both on the telecom business as well as the petrochemical business.

I was looking at some outliers here; Asian Paints, good numbers, Trent, Westside same store sales up 12%, Bata not bad, Marico okay, Pidilite good numbers. How does one read into these small pockets related to consumption? Why are they doing well?
I am sure there are different signals but I would assume Asian Paints in a sense of isolation. I would not see it as a common trend in terms of consumption. It could be also because of the correction in raw material prices. I have not studied in detail the specific reasons for these two, three names which you mentioned.

But the economy will always find some dichotomy. It is not that consumption is coming to a screeching halt Sometimes, individual companies are running some initiatives which turn out to be well. It could be inventory pipeline filling, it could be many more things. I would not read just one quarter and take it is a trend. One would rather watch out.

There is no denial of the fact that there is a slowdown in the consumption and the economy. The question to answer is whether it will recover soon or take time. Some mixed pockets will always be there. You will hear some movies doing phenomenal business in the very same slowdown period. Now what does that explain? The fact is not that consumers have stopped spending. People would spend money but it is just that one has to look at a broader trend and connect the dots over a two, three quarter period to decipher a particular trend.

Also Read

Not only largecaps, allocate to mid & smallcaps too in 2020: Vikas Khemani

We are sitting on 30% cash, buying systemically: Vikas Khemani

We are going to see a slow and steady repair in economy: Vikas Khemani, Carnelian Capital Advisors

Disappointed with govt intent to divest strategically in PSUs: Vikas Khemani

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